Guest Spot - Insider: Food Focus
4 December 2017
In September, Insider conducted a roundtable discussion with local food and drink businesses who chewed the fat at the pros and cons of different funding sources. Old Mill were delighted to offer up their office for the event and our own Phil Mills and Jolyon Stonehouse joined in on the discussion.
Primrose Matheson Founder, Primrose’s Kitchen
Justin Cornelius Managing Director, 918 Coffee Co.
Jolyon Stonehouse Head of Food & Drink, Old Mill
Austen Donnellan Business Development Director, Bray Leino
Graham Southorn Editor, South West Business Insider
Mark Treacy Regional Sales Director, Lombard South West & South Wales
Navina Bartlett Founder, Coconut Chilli
Alison Chapman Sales & Accounts Manager, Harry’s Cider
Ed Brown Co-Founder, Friska
Robert Imlach Finance Director, Liberty Fields
Peter Latham Investment Director, LDC
Phil Mills Food & Drink specialist, Old Mill
Rich Osborn Director, Fresh Range
Fraser Johnston Business Development Manager, Natural Beverage Co.
What kinds of funding have you used?
Primrose Matheson: I started with a family investor to get me off the ground and then asset-financed all the machinery for the factory. We’ve grown organically, but now we’re looking at funding for more marketing, developing new products and taking on more space. I’m looking at Seedrs (equity crowd funding) to find that extra funding.~
Austen Donnellan: A lot of the South West businesses we’ve worked with have started out by sourcing funding from family and friends. Crowdfunding is interesting – our clients want to follow well-known examples like BrewDog. But it takes a lot of time and you need to reach a lot of people. Unless you’ve got a really strong brand and a hard core of supporters, don’t try it, because the success stories are few and far between.
Rich Osborn: We’re in the middle of raising funds with Seedrs. We got sufficient lead investment, giving us momentum at the beginning, then the crowd brought some more. My advice is make sure you’ve enough lead investment and set the minimum target lower than you perhaps may need. We reached our target very quickly, in 24 hours. After that, the pressure’s off and you can talk to investors with a bit more confidence.
Peter Latham: There are pitfalls with crowdfunding. A latter-stage investor might perceive that you have a disparate shareholder base that aren’t really adding anything and are sometimes difficult to remove. I’d always look at the source bringing you the money and ask what else they’re bringing to the table. Someone with connections can be as valuable as giving up 5% more equity. When you’re looking at venture capital or private equity, you should sit opposite the person and ask whether you want to work with them and whether you get on with them.
Primrose Matheson: The management side of crowdfunding interests me. How often do investors bombard you with questions?
Rich Osborn: Seedrs has a nominee structure and it takes on a lot of the legal management after the initial fundraising. Seedrs charges a fee to investors of 7.5% on profits earned, which helps to pay for that ongoing management.
Justin Cornelius: A lot of what we do is about innovation. A lot of the equipment we’ve designed and built is not off-the-shelf products. Traditional lending streams have been very quick to close the door, so a lot of our growth has been organic. We often find ourselves being so busy that looking at various different funding streams almost takes up too much time, and that’s a Catch-22.
Alison Chapman: We’ve been involved with Lombard and particularly liked them because of the flexibility of how you can structure your repayments. We harvest apples once a year and it was great to have the flexibility to commit to an annual lump-sum payment which coincided with our harvest, and spread out the monthly payments in between. We applied for a LEADER grant through the Local Action Groups and are on a three-year programme with them.
Robert Imlach: We had a LEADER grant and I see why you have to jump through so many hoops. With any fundraising scheme, you need to know where you are, where you’re heading, what you started with, and how much it’s going to cost you. You have to have the figures at your fingertips. It’s good training. It’s quite hard work but that sort of grant funding is very useful when you start out.
Ed Brown: We’ve shied away from crowdfunding because it’s putting all our information out to the world. I go on there to be nosy and see what other businesses are up to! We’ve used most of the available funding sources, including asset finance, bank overdrafts, and mezzanine finance from Santander.
It’s expensive as bank debt goes, and designed to sit between angel funding and private equity. We used it a lot in our restaurant rollout, tacked onto an angel investment round, with asset finance coming in to increase it further. We’ve used angel loan notes too – it needn’t all be equity.
Jolyon Stonehouse: It’s interesting how crowdfunding has exploded in recent years. I like that it introduces rigour and discipline into the management of your business and its finances at an early stage. If you can get used to producing monthly management accounts and them being accurate and meaningful, you’ll know whether the decisions you’re making are the right ones.
Mark Treacy: A couple of years ago, we did some research and something like 68% of SMEs had never heard of asset finance. Part of our role is to publicise it as another route. We wouldn’t normally lend the whole value of an asset, so that sometimes means you have to get a deposit from another source. The benefits are that it’s flexible and normally quick to organise. We set great store by the asset you buy. Buying a car would be far easier to fund than a computer system, for example.
Fraser Johnston: Something that helps us with cash flow is using factoring accounts, especially for some of our big invoices, because we have a few bad payers. We’ve also used the Santander internship scheme that runs through universities. Santander will pay half of an intern’s wage for up to three months. The last intern we took on is still with us 12 months later and is now heading up our marketing. The fact that it’s part-funded de-risks it, especially because the person you’re bringing in can be a great asset. We’ve also worked with DIT (Department for International Trade). They run rounds of match-funding from £2,000 up to £30,000. The money pays for market research, flights, translations of labels, and checking label regulations.
Navina Bartlett: For me, the most vital thing is not to compromise on product quality. At this early stage of my business, my customers are generally foodies and are happy to pay a slightly inflated price. However, the cost of our ingredients can fluctuate vastly. Weuse fresh coriander as the garnish; we’re starting to think about innovative ways of growing it, whether it’s hydroponics or sited next to the production site. As yet, I can’t think of a way to scale my business without compromising somehow.
Are you aware of R&D tax credits and have you used them?
Justin Cornelius: We have used them, but my advice is to talk to your accountant and make sure they’re versed on them. We were stung by it because we got a lot of cash back but our credit score was damaged as a result. Our innovation is based on equipment, and this was claimed as an asset. It left the machinery effectively worthless, because we’d claimed that value back against our tax. Once we put our accounts in, our credit score shot down.
Phil Mills: Normally, capital assets are subject to a separate regime. To claim R&D tax credits, you need to overcome scientific uncertainty. It could be a process, a new recipe, or refining a recipe to increase shelf life. There’s either relief on your tax bill or a cash credit if you’re making a loss because of the development you’re undertaking. If you’ve spent £100 on it, you can effectively enhance the expenditure by 130%: HMRC would take £230 off your taxable profits. If you’re making profits, it can cut your tax bill significantly. If you’re making losses, which lots of businesses do when they start, you can surrender the loss from enhanced expenditure and get a cash credit at the rate of 14.5%.
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